Nine Takeaways from the USTR Summary of Negotiating Objectives

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In accordance with the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA), on 17 July 2017, the US Trade Representative published a "Summary of Specific Negotiating Objectives for the Initiation of NAFTA Negotiations" (the Objectives). This means the US Administration is authorized, for TPA purposes, to commence such negotiations as from 16 August 2017.

Set forth below are some initial observations on the Objectives from our NAFTA team in DC, Mexico City and Toronto.

1. Launch of Formal Negotiations. The Administration was required to publish the Objectives, thirty days in advance of the commencement of formal talks, in order to have any eventual NAFTA amendment considered by Congress on a "fast track" basis (i.e., a prompt "up or down" vote). Other than satisfying that technicality, the Objectives can be regarded as directed primarily to the many domestic sectors that have stakes in the updated NAFTA. The document is not binding. The final text of the new NAFTA will result from the negotiations among the three NAFTA partners as informed by interested industry and political groups in the three countries.

The Administration's NAFTA-related messaging over the months has been varied. Recent Administrative missives, combined with the trending theory that the Administration "needs a win," have given rise to speculation, reasonable in our view, that the Administration will by-in-large pursue modernization rather than fundamental overhaul, provided that at the end of the day it is able to present some form of "America First" achievement. The Objectives are consistent with the "modernization" tone. They cover items that typically arise in trade negotiations, rather than veering off into non-trade issues such as such as immigration and tax.

2. America First targets. To present an America First package to Congress and key constituencies, the US Administration will likely focus on issues such as the following.

Rules of origin. It is argued that the current ROO on autos, light trucks, engines and transmissions allow Asian suppliers too much space to dislodge US suppliers. The North American content requirement for such items is 62.5%. Mexico has signalled a willingness to increase to the figure to 70%, and US organized labor has proposed 90%. The Objectives are vague as to the ROO. One stated objective, for example, is to "update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America [emphasis added]."

US agricultural exports. The US agricultural sector generally has thrived under NAFTA, resulting in the do no harm chorus pronounced by that sector in recent months. The Objectives confirm the Administration does not intend to allow any harm to US ag exporters. In addition, one or both of the objectives to (i) "eliminate non-tariff barriers to U.S. agricultural exports including discriminatory barriers, restrictive administration of tariff rate quotas” and (ii) "expand competitive market opportunities for U.S. agricultural goods in NAFTA countries, substantially equivalent to the competitive opportunities afforded foreign exports into the U.S. market, by reducing or eliminating remaining tariffs," likely refer to Canada's supply management system in dairy and poultry. That system has been in place for fifty years and is permitted under NAFTA, but this time around the US will likely insist on its elimination. Canada was prepared to give up the system in the TPP context, but of course that was in exchange for access to the Japanese and other markets.

Levelling worker rights. It is argued that many US and Canadian employers are unable to resist the comparatively low labor costs available to them in Mexico, and that the way to build a more level playing field is to establish more robust worker rights in Mexico. The Objectives are vague with respect to this issue. One of the labor-related objectives, for example, is to require NAFTA countries to "have laws governing acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health [emphasis added]." The parties ultimately could revert to the labor-related provisions they accepted in the TPP context, which focus on the right to strike and bargain collectively.

3. Arbitration mechanism to challenge anti-dumping and countervailing duty decisions. One point on which the document is clear is Chapter 19 – the chapter providing for an arbitration mechanism to challenge anti-dumping and countervailing duty decisions. The Objectives officially confirm the Administration's intent to eliminate this mechanism. No trade agreement signed by the US since NAFTA (including the unratified TPP) includes this type of mechanism. Canada will likely resist the elimination of this mechanism, as it has enjoyed consistent success with it.

4. Arbitration mechanism to challenge government regulations allegedly undermining the value of foreign investments. The document is silent as to NAFTA's investor-state dispute settlement mechanism (ISDS). If, notwithstanding its omission from the Objectives, the Administration decides to propose removal of ISDS, Canada and Mexico quite possibly will welcome the proposal. Both countries have consistently lost in ISDS actions brought by US investors, while the US has prevailed in every challenge brought by Mexican or Canadian investors.

5. Relaxation of foreign investment restrictions. The objective to "establish rules that reduce or eliminate barriers to US investment in all sectors in the NAFTA countries" could mean almost anything at the negotiating table, but US and Canadian investors will press for a focus on several sectors in Mexico that remain out of their reach, including telecom, transportation, media and real estate. A specific telecom reference to "facilitating market entry" may signal more modest adjustments in that sector. Similarly, the objectives specifically referencing financial services mention "fairer and more open conditions" rather than the elimination of barriers.

6. Digital trade. The Objectives include TPP-like language denouncing cross-border data flow restrictions and data localization requirements. Unlike the TPP, the Objectives specifically call for the prohibition of such restrictions in the financial services sector. The freedom to choose where to locate IT infrastructure is of importance to US bankers. On the other hand, the Objectives omit many of the TPP provisions that had been publicized as "cutting edge obligations designed to promote the digital economy."

7. Intellectual property. The Objectives highlight medicines and digital rights as areas meriting strong IP protection. In the case of medicines, this could be directed to the limited patent scope that has been accorded to Canadian biopharmaceutical patents. In recent years Canadian courts have frequently ruled patents invalid due to a lack of utility, determining utility in accordance with standards the U.S. and others argue are out of step with TRIPS requirements. Last month the Canadian Supreme Court issued a decision that appears to bring Canadian law more into compliance with the TRIPS requirements. The US may well want to see that decision made an express part of Canadian legislation. In the case of digital rights, Mexico has been criticized as lacking an effective take down policy and penalties for online infringement. The widespread distribution of audiovisual materials has been singled out for reform. Canada and Mexico may already be considering these issues given that the TPP requires all members to be TRIPS-compliant.

In addition, the US may press Mexico to the ensure enforcement of criminal penalties for IP violations such as counterfeiting, copyright infringement and trade secret misappropriation.

8. Silence on steel. The document's silence regarding steel is of concern to many interested parties who are hoping the US will exempt Canada and Mexico from the Section 232 actions under consideration, and deal with the steel issue in the NAFTA talks. That continues to be a possibility but this document leaves all options open. That concern may be heightened by the inclusion of an objective to "eliminate the NAFTA global safeguard exclusion" that under certain circumstances allows products from a NAFTA country to escape tariffs or quotas imposed by a NAFTA partner as part of a multilateral safeguard action.

9. Express delivery shipments. Two of the "customs and trade facilitation" objectives are to "provide for streamlined and expedited customs treatment for express delivery shipments, including for shipments above any de minimis threshold, and "provide for a de minimis shipment value comparable to the U.S. de minimis shipment value of $800." The current thresholds are USD 800 in the US, USD 20 in Canada and USD 50 in Mexico. This change would have a significant impact on day-to-day cross-border retail trade among the three countries.

We hope this is helpful. Since the initial NAFTA negotiations began over twenty-five years ago, Baker McKenzie has had a unique, multi-disciplinary and multi-jurisdictional team in place to assist clients with NAFTA-related issues. If you have any questions, please contact one of the individuals listed below, or your primary Baker McKenzie contact.